Economist mostly optimistic about outlook for 2014

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The economy looks “very good,” said Wells Fargo’s director and senior economist, but there are still uncertainties, risks and threats to be faced in 2014.

Eugenio Alemán presented a U.S. and regional economic outlook Thursday at an event hosted by Wells Fargo for its clients at the University Club.

“For the last three years, the economy has been improving, but people didn’t believe it,” Alemán said. For the first time, people are recognizing that the economy is recovering, he said.

The biggest risk for the U.S. economy is how the Federal Reserve is going to unwind and get rid of the $85 billion in assets it’s buying every month, he said. Tapering began in January, reducing the number amount of assets purchased to $75 billion.

This action hasn’t been taken before, creating uncertainty about how the tapering will be handled and what the response will be. Interest rates will start to go up, and Alemán said he expects the Fed will do its best to keep the increase contained for one or two more years.

The housing market has improved, with prices up about 10 to 15 percent nationwide. The Federal Reserve is “still concerned,” Alemán said, adding that it wants to bring down negative equity to allow people to refinance or sell their homes.

Housing prices could be the biggest threat to the economy, he said. Mortgage lending isn’t growing and has been shrinking for several years.

Two-thirds of all purchases in the housing market are mortgage-based; the remaining one-third are mostly investors and foreigners making cash purchases.

“What is going to happen when these people are out? What happens to home prices when investors and foreigners are out of the picture? That is a big concern,” Alemán said.

It’s not a concern calling for a serious crisis, he said, but a concern that it could push prices lower — which could be good and bad.

Affordability is a concern in California, especially in coastal communities, Alemán said. Affordability in San Diego isn’t as bad as it was before the crisis, he said, but has worsened as home prices continue to rise.

Construction permits are behind the curve, causing a pent-up demand for housing and taking prices higher.

“It’s very difficult, especially in California with the rules and regulations to build and put homes together and be ahead of the curve,” Alemán said.

Single-family housing permits in San Diego are not recovering, but multifamily has recovered considerably and continues to recover, which is typical of the rest of the United States, Alemán said.

One uncertainty for the coming year are fiscal issues, such as raising the debt ceiling, Alemán said, but “the rest of the economy looks very good.”

Employment has been consistently improving at a “relatively strong rate” for some time, he said, adding that 9 million jobs were lost and 7.5 million jobs have been recovered since the recession. The reason all 9 million jobs haven’t been recovered is because the government laid off 1.5 million workers, he said.

“Every sector is growing jobs except the government,” Alemán said. Most of the lost jobs were in state and local governments.

Unemployment has dropped down to about 7 percent, but the reason is “not good,” Alemán said. The biggest reason is because people are dropping out of the workforce, such as retiring baby boomers, people tired of looking for a job, and people going back to school to update their skills.

The government isn’t “spending like crazy,” Alemán said. “It’s actually doing a terrific job of slowing down expenditures.”

Government has been decreasing expenditures over the past four years and expenditures as a percentage of GDP at 20.8 percent in September is about average for the past 50 years, he said.

Expenditures aren’t increasing as a percentage of GDP because the economy is growing – not fast, but it is growing – Alemán said, which shows “the economy is not as bad as you would think.”

The economy is growing at about 1.5 percent to 2 percent, Alemán said, which is about half the rate of prerecession levels. He expects the U.S. economy to grow at 2.1 percent this year and 2.6 percent in 2015.

Another concern is consumer credit, which Alemán said is “nowhere to be found.”

“This is what has been the bread and butter of the U.S. consumer and it’s not occurring,” he said.

Revolving credit, including credit card lending, has “just disappeared,” while nonrevolving credit such as auto loans and student loans, is still working, he said.

The personal savings rate has improved to more than 4.5 percent — it had gone down to 2.5 percent before the crisis and then rose to about 7 percent.

Consumers are using their savings again for purchases because income growth is weak, which Alemán said is unsustainable. Increasing home prices have caused people to use their savings to consume, because they feel they manage to save through housing.

Wells Fargo Executive(s):

Jan. 13, 2015 -- George Chamberlin sits down with John Manley, chief equity strategist for Wells Fargo Funds Management, and James Kochan, chief fixed income strategist for Wells Fargo, to discuss how the stock market, interest rates and other financial matters fared in 2014.